What is Impermanent Loss?
The main reason for the impermanent loss of principal of liquid market makers under the AMM system is that if the prices of unstable assets in the liquidity pool rise or fall under the AMM mechanism, market makers will completely and automatically behave in the opposite way to the general traders in the market, selling the more they rise and buying the more they fall, so that when the price of assets in the pool rises, their quantity decreases, and when the price of assets rises, their quantity increases.
Assuming you are making a market in the liquid pool ETH/USDT and the swap price is set at 1 ETH = 300 USDT, you will be providing 10 ETH/3000 USDT of liquidity in the system.
Now your share of the liquid pool becomes 9.91 ETH/3026.97 USDT, which is less ETH and more USDT than at the beginning.
Impermanent losses, which are common at the beginning of a market or during a sideways market, are gradually wiped out as commissions accumulate and price fluctuations occur, realizing market-making gains.
October 12, 2020